Pension360

In 1988, oil giant BP switched its workers’ retirement benefit package from a defined benefit system to a 401(k) system.

But two workers, who sued the company on Wednesday, say BP misled its employees about the nature of the changes and promised to shoulder the extra risk associated with a 401(k) account.

More from the Houston Press:

For more than three decades Fredric “Fritz” Guenther has worked for oil companies on Alaska’s treacherous North Slope.

Guenther, 56, will not be retiring in three years. He’s one of two BP employees who sued the oil giant in Houston federal court Wednesday, claiming the company misled workers when it changed how their pension benefits were calculated back in 1989. Internal company records filed in court show the company knew as early as 1988 that the switch from a traditional defined benefit plan to a 401(k)-like cash balance plan could hurt pensioners like Guenther. Instead of warning them, Guenther’s lawsuit alleges, BP promised workers that the company would shoulder any risk that came with pegging their retirement benefits to the market.

[…]

One memo to employees regarding the new plan reads, “BP America is responsible for funding, and bears the full investment risk. And the plan provides a retirement benefit to career employees that is comparable to the fully competitive benefit under the prior formula.”

BP spokesman Brett Clanton emailed us this statement yesterday: “BP greatly values its employees and retirees. We have not been served with this suit but believe the management of the pension program for this group of employees is in compliance with the law.”

Guenther’s lawyers estimate there could be as many as 1,000 former or current BP workers in the same boat. In 2011, about 450 of them, including Guenther, filed a complaint with BP’s Office of the Ombudsman, a position created in the wake of the 2005 explosion at BP’s Texas City refinery to better address health, safety and other worker issues. The ombudsman, federal district court judge Stanley Sporkin, investigated their complaints for three years before recommending that BP fix its mistake and give the workers the benefits the company had promised.

Read the full story here.

CalSTRS CIO Chris Ailman on Wednesday appeared on Bloomberg TV to discuss whether the road to the U.S.’ economic growth lies through big banks, and his outlook on banks and the economy.

Watch the discussion, above.

 

Video credit: Bloomberg

Photo by Stephen Curtin via Flickr CC License

A group of large investors, including CalPERS and the New York Common Retirement Fund, are calling on major energy companies to disclose the risks of climate change on their finances.

More from the LA Times:

Shareholders of Exxon Mobil, Chevron Corp. and seven other energy companies will soon gather for annual meetings where votes will be cast on climate risk disclosure. The proposals ask the companies to evaluate and disclose the potential financial fallout of recent international commitments to hold the planet’s rise in average temperatures below 2 degrees Celsius.

[…]

CalPERS and 31 investors, including New York City’s pension funds and BNP Paribas Investment Partners, want to know how much of the companies’ petroleum reserves must stay in the ground to meet greenhouse gas emission limits.

“The world is a different place, and you can’t manage what you can’t measure,” said Anne Simpson, a CalPERS investment director.

Since 1990, Exxon Mobil’s executives have repeatedly opposed similar campaigns by activist shareholders. But with heightened interest following the Paris agreement, this year’s vote could reveal a shift in investors’ mood, analysts said.

“This is part of a broader call by investors for disclosure on how companies are going to adapt to a 2-degree future,” said Shanna Cleveland, a senior manager at Ceres, a nonprofit working with business people on climate issues. “CalPERS has really stepped in to play a leadership role … working to get the message out to other major shareholders.”

CalPERS, for its part, owns more than $1 billion in Exxon shares and $800 million in Chevron shares.

 

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State and local governments have now had time to process and implement GASB’s most recent pension accounting and financial reporting requirements.

This week, the agency released Statement No. 82, which clarifies and/or amends certain aspects of previous statements.

Details, from AccountingWeb:

Here’s what changed:

Presentation of payroll-related measures in required supplementary information. The new guidance amends Statement No. 67 and Statement No. 68 to require the presentation of covered payroll, defined as the payroll on which contributions to a pension plan are based, and ratios that use that measure. Statement No. 67 and Statement No. 68 previously required presentation of covered-employee payroll, which is the payroll of employees who are provided with pensions through the pension plan, and ratios that use that measure in schedules of required supplementary information.

Selection of assumptions. The new guidance clarifies that a deviation, as the term is used in Actuarial Standards of Practice issued by the Actuarial Standards Board, from the guidance in an Actuarial Standard of Practice is not considered to conform with the requirements of Statement No. 67, Statement No. 68, or Statement No. 73 for the selection of assumptions used in determining the total pension liability and related measures.

Classification of employer-paid member contributions. The new guidance clarifies that payments made by an employer to satisfy contribution requirements that are identified by the pension plan terms as “plan member contribution requirements” should be classified as “plan member contributions” for purposes of Statement No. 67 and as “employee contributions” for purposes of Statement No. 68. It also states that an employer’s expense and expenditures for those amounts should be recognized in the period for which the contribution is assessed and classified in the same manner as the employer classifies similar compensation other than pensions (for example, as salaries and wages or as fringe benefits).

See Statement 82 here.

 

Photo by Laura Gilmore via Flickr CC License

Hundreds of Puerto Rico’s current and retired Catholic schoolteachers got news recently that their pensions will be eliminated due to the system’s insolvency.

The news is ominous for the country’s entire public sector. Government workers haven’t yet been stripped of their pensions, but future cuts could come as the country defaults on debt and looks for cost-saving measures.

More from the New York Times:

After 36 years teaching English at a Roman Catholic school near Puerto Rico’s capital, Norma Cardoza planned to retire with a modest pension she trusted she would get from the Archdiocese of San Juan.

Her faith was misplaced.

Archdiocese officials in recent weeks informed Cardoza and several hundred other current and retired teachers that their pensions will be eliminated because payouts exceeded contributions.

[…]

Government workers haven’t yet gotten the same bad news on pensions. But mired in a deep economic crisis, the island government has begun defaulting on billions in debt. Many financial experts here and on the U.S. mainland say underfunded public pension obligations totaling more than $41 billion will likely wind up on the chopping block.

If the money runs out, public school teachers, police officers, firefighters and thousands of other government employees could have their pensions cut, too.

Vicente Feliciano, an economist and business consultant in San Juan, predicts that various public pension systems will be unable to make full payments within two years. “When that happens, then what? Do we leave retirees on the street?” he says.

The Puerto Rico government employs about 120,000 people.

 

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Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

California Gov. Jerry Brown’s plan to reduce state worker retiree health care costs got only a small nod in a tentative CSU faculty contract agreement last week. But three unions have agreed to begin paying down one of the state’s fastest-growing costs and largest debts.

Part of the plan Brown proposed last year hit a wall of opposition in the Legislature. An optional low-cost health plan would have taken less from the paycheck, but more from the pocket before insurance begins paying medical expenses.

The new state budget Brown proposed in January still expects major long-term savings from the retireee health care plan requiring state workers to begin paying some of the cost while on the job, work longer to become eligible, and pay higher premiums after retiring.

“Even though the private sector is eliminating these types of benefits, the state can preserve retiree health benefits for career workers,” said the governor’s Finance department budget summary.

How fast are costs growing?

The state paid $458 million in 2001 (0.6 percent of the general fund) for state worker retiree health care and is expected to pay $2 billion (1.7 percent of the general fund) next fiscal year — up 80 percent in just the last decade. (see Finance chart below)

The debt or “unfunded liability” for retiree health care promised state workers has grown to $74.1 billion, state controller Betty Yee reported in January — much larger than the unfunded liability reported by CalPERS for state worker pensions, $43.3 billion.

As the budget summary noted, employer paid retiree health care is rare in the private sector. And in what Brown has called an “anomaly,” the state pays a larger share of retiree health care costs for retirees than for active workers.

The state usually pays 100 percent of the health care insurance premium for retirees and 90 percent of the premium for dependents. For active workers, the state pays 80 to 85 percent of the premium and for their dependents 80 percent, depending on bargaining.

State workers, who can retire as early as age 50 though few do, are expected to switch to federal Medicare when they become eligible at age 65. A state supplement continues to cover costs not paid by Medicare.

Brown’s plan, meanwhile, could take decades to cut costs. But without action, said the budget summary, the state worker retiree health care debt could grow to $100 billion in five years and to $300 billion in three decades.

The big change puts money into a pension-like investment fund to yield earnings that can help pay retiree health care in the future. CalPERS expects its investment fund, valued at $288 billion last week, to pay two-thirds of future pension costs.

The state has only been paying annual retiree health care premiums, setting no money aside to “prefund” or pay for the retiree health care earned by active workers each year.

This “pay-as-you-go” policy forces future generations to help pay for the cost of current workers. By passing on the debt, lawmakers have more money to spend on other programs.

In the early 1990s, legislation by former Assemblyman Dave Elder, D-Long Beach, created an investment fund for state worker retiree health care. But lawmakers chose not to put money into the fund.

Brown’s plan, as in his previous pension reform, calls for the state and its current employees to pay equal shares of the “normal cost,” a contribution to the investment fund to cover the estimated cost of the retiree health care earned during a year.

But as with pensions, only the state, not the employee, has to pay for the debt from previous years often caused by investments failing to earn the expected amount, a big risk at the center of the public pension debate.

Brown’s plan also requires five more years of service to become eligible for retiree health care. Current workers are eligible for 50 percent coverage after 10 years on the job, increasing to 100 percent after 20 years. The new thresholds are 15 and 25 years.

A third part of the plan eventually ends the anomaly of employer-paid health coverage increasing on retirement, regarded by some as an incentive for early retirement. For new hires, retiree health coverage is capped at the level of active workers.

“Over the next 50 years, this approach will save $240 billion statewide,” said the state budget summary. “The Budget sets aside $300 million General Fund to pay for potential increases in employee compensation as part of these good faith negotiations.”

Pay raises are part of three new state worker contracts bargained by the Brown administration that begin prefunding retiree health care under the governor’s plan.

A tentative contract with the California Correctional Peace Officers Association last month, which members are being asked to ratify now, phases in a retiree health contribution of 4 percent of pay by 2019 along with three annual 3 percent pay raises.

A contract with a scientists union phases in a 2.8 percent retiree health contribution by 2019 with three 5 percent annual pay raises. An engineers contract phases in a 2 percent contribution by 2019 with a 5 percent pay raise next year and a 2 percent raise the following year.

The state has not reached an agreement on another contract that expired last July, crafts and maintenance. It’s one of three bargaining units that began prefunding retiree health care prior to the governor’s plan, contributing 0.5 percent of pay.

Physicians are contributing 0.5 percent of pay under a contract that expires this July. State worker retiree health care prefunding began in 2010 with the Highway Patrol contributing 0.5 percent of pay, which is now 2 percent until 2018.

The big round of state worker retire health care bargaining begins when 15 contracts expire this July, nine of them in bargaining units represented by the largest state worker union, SEIU Local 1000.

California State University employees have been paying less for the same pension received by most state workers, 5 percent of pay instead of 8 percent. To shift the shortfall in employee funding to CSU, the Brown administration reduced its funding.

The tentative contract announced last week, negotiated by CSU not the Brown administration, averted a strike by giving a 10.5 percent pay raise over two years to a CSU faculty that contended its pay has lagged UC and community colleges for a decade.

A CSU faculty association summary of the agreement shows no change in the pension contribution. But for faculty hired after July 1, 2017, ten years of service will be needed to be eligible for retiree health care, up from five years for current employees.

The nonpartisan Legislative Analyst’s Office suggested last year that there is “some ambiguity” about whether retiree health care is, like pensions, a “vested right” widely believed to be protected against cuts by a series of state court decisions.

Possibly strengthening the right to retiree health care was not mentioned as an incentive in the negotiations that led to the first contract that the state budget summary said “lays out the approach” for the Brown retiree health care plan.

“Vesting didn’t come up in bargaining,” said Bruce Blanning, executive director of Professional Engineers in California Government. “It wasn’t implied or suggested at all.”

 

Photo by Steve Rhodes via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

New York’s New School of Social Research recently put out a blog comment, Teresa Ghilarducci’s Revolutionary Retirement Plan:

Americans do not have enough saved for retirement. In 2013, 28 percent of families had no retirement savings at all. Among those who do have some savings in their retirement accounts, the median balance for families nearing retirement is only $12,000.

In addition, the number of employers offering their workers retirement savings plans at work is declining. Between 1999 and 2011, the availability of employer-sponsored retirement plans in the United States fell from 61 percent to 53 percent. When employers do offer plans, they are more likely to be defined contribution plans in the form of a 401(k) than a traditional pension. These plans come with high risk, high fees, and large penalties for early withdrawals, all of which erode workers’ total savings.

These savings and coverage rates foretell a coming retirement crisis in the United States. Without enough retirement income, 16 million retirees will live in poverty or at near-poverty levels by 2022.

To prevent seniors from experiencing deprivation in their golden years, Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis and professor of economics at The New School for Social Research, has proposed a simple yet radical solution. The Retirement Savings Plan (RSP) she co-authored with Blackstone President Tony James proposes to create Guaranteed Retirement Accounts (GRAs). The proposal would require employees and employers to contribute 3 percent of a worker’s salary to an individually owned GRA. Employees and employers would contribute 1.5 percent each, and savings would be managed by professional portfolio managers. By prohibiting early withdrawals, GRAs would ensure that savings could be invested in long-term investments, which earn higher rates of return than short-term 401(k) investments.

Under a 401(k) plan, retirement savings are paid out in a lump sum, and retirees must determine how much money they should be using each year, leaving people vulnerable to outliving their savings. Under GRAs, when workers retire, their savings are paid out in an annuity, a guaranteed monthly payment for the rest of their lives, so that they don’t need to worry about budgeting correctly or outliving their retirement funds.

The plan is deficit neutral and will not cost the government additional funds. Rather, the plan calls for redirecting current tax deductions to better support retirement savings for those who need it most.

“Our ‘do-it-yourself’ retirement system is a failed experiment that has left Americans at risk of experiencing downward mobility in their golden years,” says Ghilarducci. “The GRA proposal is a no-cost solution to ensure that millions of Americans can retire after a lifetime of work without the risk of falling into poverty.”

Other nations have adopted similar plans, including Britain and Australia. The plans have seen varying measure of success, and time will tell if this can sway public opinion here in the United States. Ghilarducci’s plan is a solution that can prevent the impending crisis.

First, let me agree with professor Ghilarducci, the United States of pension poverty is experiencing a massive retirement crisis, one that will impact aggregate demand for decades to come (people retiring in droves will spend less as when they retire in poverty).

Second, she’s absolutely right, the brutal truth on defined-contribution plans is they don’t work and leave millions of people vulnerable to the vagaries of public markets. Moreover, the great 401(k) experiment has failed and it’s high time Congress stops sucking up to Wall Street, nuking pensions and facilitating their mass looting, and addresses the ongoing retirement crisis with real long-term solutions.

Third, the demise of the Central States Pension Fund which I discussed earlier this week when I covered pensions and the Wall Street mob, should serve as a wake-up call to millions of Americans who naively think their workplace pensions are safe and managed properly.

Fourth, even traditional defined-benefit plans are at risk in the United States. The deflation tsunami will decimate all pensions, especially those that are chronically underfunded. Some states, like Michigan and Alaska, have given up on defined-benefit plans, closing them for “cheaper” defined-contribution plans that aren’t backed by taxpayers (a dumb move that will ensure more pension poverty in these states).

So, I agree with Teresa Ghilarducci, there is a big problem but I fundamentally disagree with her solution to America’s retirement crisis which she proposes in a paper she co-authored with Blackstone’s Tony James.

You can read my thoughts here but basically any solution which is being peddled by Blackstone will benefit mostly Wall Street, not Main Street, ensuring the quiet screwing of America continues (and if you want the truth, even Fidelity slapped Blackstone this week, pulling out of its fund of hedge funds mutual fund, forcing its shutdown).

More specifically, I take issue with claims that this revolutionary retirement plan is “deficit neutral”. Really? So people are going to be investing in products that are mostly based on the whims and fancies of public markets and when they retire, they will convert their savings into annuities which will lock them into ultra low rates for years? And this is deficit neutral? All this will do is ensure more pension poverty and higher social welfare costs down the road (raising the debt and deficit).

I think Tony James and Teresa Ghilarducci need to study Canada’s Top Ten pensions more closely to understand the benefits of large, well-governed defined-benefit pensions.

What is my solution to America’s great retirement crisis? I discussed my ideas in an older comment on Teamsters’ pension fund:

Let be clear here, I don’t like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I’ve shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

…politics aside, I’m definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don’t work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they’re incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That’s the real challenge that lies ahead.

Yes folks, it’s high time the United States goes Dutch on pensions and follows the Canadian model of pension governance as well as implements a shared risk pension model to ensure the sustainability of defined-benefit plans.

A truly revolutionary retirement plan would enhance Social Security and have it managed by one or several large, well-governed public pension funds backed by the full faith and credit of the U.S. government. 

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class and as thousands retire with little or no savings, it will only ensure that once deflation comes to America, it will be here for a very long time. And this means rates will stay low for years (never mind what Jamie Dimon states publicly, privately he’s petrified of this deflation scenario).

 

Photo by Roland O’Daniel via Flickr CC License

A Philadelphia councilman is exploring the idea, originally proposed by the city Controller, of offering pension buyouts to the city’s pensioners.

The council will hold hearings on the issue to hear testimony from experts and stakeholders.

More from CBS:

At last week’s council session, Derek Green introduced a resolution to hold hearings on pension buy-outs.

“It’s just an interesting and creative way to try to address the issue we have in reference to our pension system, which is currently about 45 percent funded,” Green said.

The city is close to 6 Billion dollars short on its 11-billion dollar pension obligation to city workers, a common problem governments are facing. The buy-out proposal was first advanced by city controller Alan Butkovitz, who suggested the onetime pay-outs would be about half of what workers might collect in monthly payments after retirement. District Council 47 president Fred Wright, who represents the city’s white-collar workers says he’d testify against it.

“It’s a good deal for the city,” Wright said. “It’s not a good deal for the pensioners.”

Philadelphia would be the first major city to offer pension buyouts.

 

Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg

It’s going to be difficult for pension funds to meet their assumed rates of returns for at least the next few years, according to several CIOs who participated in a panel discussion at Wednesday’s Pension Bridge Annual Conference.

The panel featured CIOs from several of the country’s largest public pension funds.

More on the remarks, from P&I:

The Federal Reserve’s actions in keeping interest rates low is resulting in lower returns and lower funding ratios, explained John D. Skjervem, CIO of the of the Tigard-based Oregon Investment Council.

[…]

Pension fund officials have added as much risk to Oregon’s portfolio as they can without taking irresponsible risks, Mr. Skjervem said.

“We are return takers, not return makers,” Mr. Skjervem said.

Thomas Tull, CIO of the Texas Employees Retirement System, Austin, said on the panel that officials at the $24.1 billion pension fund think the low-return environment will require “more tactical asset allocation … and going outside the box.”

Pension fund boards have to understand that this is an investment environment in which the chances of making a pension fund’s assumed rate of return in the next year or so are not high, said Scott C. Evans, deputy comptroller for asset management and CIO of the $162.1 billion New York City Retirement Systems, who also spoke on the panel.

Investment officials could invest more aggressively, “which might be fun but that is not our job,” Mr. Evans said.

“Our job is to make the board understand the realities of the marketplace,” Mr. Evans said.

Read more about Pension Bridge here.

 

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